FX: Strong US GDP May Not be Enough to Drive Risk Rally

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The euro sold off aggressively into the North American trading session with European stocks down, Spanish, Italian and Portuguese 10 year bond yields edging higher and S&P futures pointing to another weak open for U.S. equities. There has been no single driver of the sell-off in euro but continued challenges in Greek Troika talks, yesterday’s downgrade of French banks and a record high unemployment rate for Spain in the third quarter, decline in business confidence in Italy and lower consumer confidence in France all contributed to the currency’s weakness. Consumers grew more confident in Germany but this failed to help the euro and only widened the spread between German and Spanish, Italian and Portuguese bonds.

Meanwhile the U.S. dollar received support from stronger than expected third quarter GDP numbers. The U.S. economy expanded by 2.0% in Q3 compared to a forecast for growth of 1.8%. While growth in the U.S. didn’t reach a 5 year high like growth in the U.K., the fact that the economy grew at a faster pace last month is still good news for the U.S. dollar. The drought experienced in the summer shaved 0.4% off of GDP but that was compensated by a 3.7% increase in government spending. While the back to back improvements in U.S. data will help boost President Obama’s chances of reelection on November 6th, the decline in the savings rate suggests that there is still underlying weakness in the U.S. economy. Based on the market’s initial reaction to GDP, it doesn’t look like the stronger report will be enough to drive a much needed risk rally.

The following chart compares the intraday move in S&P futures with the intraday move in the EUR/USD:

Kathy Lien
Managing Director

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